Proportionate section 14A disallowance: Rule 8D relief granted where exempt income was limited despite active mutual fund investing.

A section 14A disallowance computed under Rule 8D was held excessive where the assessee had substantial mutual fund transactions and associated investment activity, but exempt income was limited. Some expenditure attributable to earning exempt income could be inferred, yet the disallowance had to remain proportionate to the income generated. On those facts, the original disallowance was restricted to 10% of the amount made, and the assessee obtained relief to that extent.

---

---

Issues: Whether the disallowance made under section 14A by applying Rule 8D was excessive and required restriction in light of the assessee's exempt income and investment activity.

Analysis: The assessee had substantial mutual fund transactions during the year, with large purchases, sales, and investment balances, along with significant employee benefit and other business expenses. The exempt income, however, was only Rs. 8.17 lakhs. On these facts, some expenditure attributable to the investment activity could not be ruled out, but a disallowance of Rs. 22.20 lakhs was considered disproportionate to the exempt income earned. The disallowance was therefore restricted to 10% of the amount originally made.

Conclusion: The disallowance under section 14A was reduced to Rs. 2.20 lakhs, and the assessee succeeded to that extent.

---